A Guide to Estate Planning Terms
What does that jargon actually mean?
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Wait - what?
When it comes to estate planning, professional advisors will throw around words and acronyms as though the public had been using them since first reaching the age of reason.
To be fair, not all advisors are guilty of overjargoning, and most try to not use language clients and prospects might find unfamiliar. But even some of the more common terms might not be readily understood by an audience not immersed in the world of trusts and estates. I’d like to demystify some of those estate planning terms, with full knowledge that some of them bring with them differing interpretations. (It should be noted that federal or state statutes, as well as any actual controlling legal documents such as trusts or wills, are the ultimate resource for determining what a particular word or phrase means in any given context.)
A trust is a legal document that fundamentally involves three parties: a grantor, a beneficiary and a trustee: The grantor creates the trust. The grantor may also be referred to as “trustor,” “creator” or, in certain trusts with some charitable intent, “donor.”
The trustee manages the assets in the trust for the beneficiaries, based on the grantor’s direction spelled out in the trust document. The trustee – who holds legal title to trust assets – owes a fiduciary duty to the beneficiaries, meaning that trustee is required to act in the best interests of trust beneficiaries while fulfilling the terms of the trust. There can also be co-trustees who share duties based on the terms of the trust, or successor trustees who step in when a current trustee’s term ends (due to death, incapacity, resignati on, removal, etc.), depending on the terms of the trust.
Just to muddy the waters a little bit: The term “grantor trust” is actually defined in the Internal Revenue Code to mean a trust where the grantor is deemed the owner of trust assets for income tax purposes. Also, there is a “living trust,” which usually refers to a revocable trust created during the grantor’s life with the grantor as the initial trustee – such a trust is often created to avoid the probate process (see below).
The beneficiary is the ultimate recipient of the trust’s assets, as determined by the grantor in the trust document. Beneficiaries named within trusts can take many forms: There may be an income beneficiary (who may be entitled to current trust income), a remainder beneficiary (who benefits from the trust after an income beneficiary) or even a remote contingent remainder beneficiary (who should probably not count on receiving much of anything). Outside of the trust context, the term beneficiary is also used to designate who ultimately may benefit from certain financial accounts such as IRAs, annuities, qualified plans such as 401(k)s, and life insurance policies.
Like a trust, a will is a legal document that uses its own unique terminology to describe who does what. A will is created by a testator to specify how their assets will be distributed at death (at which point the testator becomes the decedent) and to potentially appoint a guardian for any minor children of the testator / decedent. The language within the will can appoint an executor to manage probate, which is a state court process designed to prove that a will is valid, distribute assets per the will’s terms and assure creditors are accounted for. The probate process can also be used to distribute assets where someone dies without a will or other clear means of passing on assets. In such a case, an administrator is appointed by the court to serve in a role similar to executor. (Both may be referred to as personal representative.) One who dies without a will is deemed to die intestate, while someone who dies with a valid will is deemed to die testate. The probate process can take time, cost money and be a very public process, so planners will suggest avoiding probate either through certain forms of joint property ownership, proper designation of beneficiaries on certain financial accounts, and through creation of a living trust.
One last player in the world of estate planning is the state. The state of domicile of the decedent – that is, where their primary residence was at the time of their death – is typically the state where the probate process will take place. The situs of a trust refers to what particular state laws may apply in the administration or interpretation of a trust. This can be a very complex topic and is a very important consideration, but is beyond the scope of what is being covered here.
Another set of terms that can cause confusion relates to powers, particularly a “power of appointment” versus “power of attorney.” As the names imply, both involve someone (the “holder”) being granted an ability to act through a legal document. Powers of attorney are typically standalone documents, whereas powers of appointment are most often related to a particular trust.
A power of appointment is where a grantor of a trust gives someone other than the trustee the ability to appoint assets of the trust to someone at a specified time – often at the holder’s passing, perhaps through their own will. A general power of appointment can be a very broad power and can include the ability to appoint those assets to anyone (even themself) as well as their creditors or their estate. Alternatively, the power of appointment may be more restrictive: Limited or special powers of appointment might include only a certain group of people for a more defined purpose. General powers of appointment give the holder a great deal of latitude to control where trust assets end up and, as such, cause those assets to be included in the holder’s estate for estate tax purposes – even if the power is never exercised.
A power of attorney, on the other hand, is where a principal grants another person (“the agent”) the ability to legally act on the principal’s behalf, either broadly or for a specific purpose or transaction. This power may spring to life when the principal becomes incapacitated and unable to act on their own behalf (“springing power”) or remain in effect when the principal loses their faculties (“durable power”). One specific example is a healthcare power of attorney, which is used by a principal to appoint someone else to make medical decisions on their behalf in the event they are unable to speak for themselves. Contrast that with a living will, which is a document that allows someone to express their own wishes regarding medical care if again they cannot speak for themselves. With a healthcare power of attorney, the principal puts those decisions in someone else’s hands, while with a living will, the principal directs medical personnel as to how they want to be treated. Both are important and should be considered by individuals regardless of estate size in consultation with an attorney who understands the local state laws and common practices regarding such instruments. (See “Address Potential Incapacity With Estate Planning,” for more on the power of attorney.)
The Four-Letter Words
The world of trusts and estate planning is littered with acronyms – most of them four letters, mostly ending with a “T.” In addition to some of the “common” examples cited earlier, there are also ESBT, QSST, QTIP, QDOT and so many more. Exploring what they all mean (other than the final “T” usually standing for “Trust”) would require a deeper dive into the peculiarities of trust or estate planning jargon. But rest assured, those acronyms and techniques can be powerful in the right situation. Whether you can benefit from these techniques can only be determined by laying out your overall goals and circumstances and then tackling the alphabet soup – working with advisors who not only speak the language but can translate its personal meaning.